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Weekly Digest (Economics, Finance and Banking) 12 July - 18 July 2016

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In my philosophical and physics studies, negentropy (entropy in reverse engineered mode) was always pitted against entropy, and smuggling one notion of order and disorder into the other discipline was always a matter of convenience, rather than coming to terms with the inconvenient truth. In sum, entropy, randomness, disorder or stochasticity of the universe always increases, and alas! my dream of correlating the entropy of the astrophysics with the illusory negentropy of the political theory often finds denominations in dreams and abstruse generalisations. Somewhere, like a narcissist, I am aware of brutal sense I make, albeit in no accordance with any affiliations. Thats in accordance and turmoiling. Another week of turmoil, both internationally and nationally. 

The French have a saying, ‘un malheur n’arrive jamais seul.’ That translates into ‘when it rains, it pours.’ This neatly sums up the Nice horrorWelcome to a new era: The Erdogan Sultanate: Turkish have had a history of failed coups, a pattern almost getting tragico-farcical. The release of augmented reality, Pokemon Go (was it really augmented?) has been slammed by DDOS attack, overburdening servers. Anyways, we have crossed the tipping point of the cusp on to the fourth industrial revolution (revisit Davos 2016), and sad as always, left, and specifically the Indian Left doesn't even bother giving it a flying kiss.  

Nationally, Kashmir has been on the boil. My friend and colleague Anil Tharayath Varghese was most brilliant and lyrical when he quipped: "Bullets and pellets rhyme in verses..... But both are piercing the bodies and lives of people in Kashmir. Anyway lives are not rhythmic metres...."   And the best way to nip the seeds of dissent in the bud is to place a blockade on the media, which has been fine tuned, and send in paramilitary to deracinate traces. Ain't that typifying Modus Operandi, oooopsss Modi's Operandi? So, why shouldn't the Kashmiris be vindicated? Phoenix rising for the Congress in Arunachal, and a tight slap to the duo of AS-NM. 

PLEASE STAND WITH PIYUSH MANUSH. SALUTATIONS TO ABSOLUTE DEDICATION AND DETERMINATION. 

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In the past few years both the political Left and Right of the current global machine, the “Establishment” now dictates who will be included or excluded from their dominion. Whatever the hell that is? Ah, yes, it always comes down to this bugaboo… the “System” – a sort of Death Inc., a global matrix of social, military, and economic power that pervades every aspect of our lives to the point its become ubiquitous, invisible and so invasive that we’re trapped not by its outer and more superficial conveyances, those mediatainment systems of political stupidity we term government, or Wall-Street, or War; no, rather it is the more subtle pervasiveness of technics and technology that we’ve become so enamored with, that defines and delimits both our passions and our world that is the dark power over our lives in this age of fracture. We are living in a world of mass media which daily exposes society’s innate hypocrisy, its contradictions and the apparent failure of almost every facet of our social and political life. The young have seen their “activist” participatory democracy turn into its antithesis - nihilistic virtues, and nothing is more vicious than this. This is the extension of the practice of “murketing” to political action itself. Pop fascination with the role of social media in protest movements only strengthens this development. Sartre said "Hell is the Other People", but WE have convinced ourselves of Schizophrenia.   

Public Finance Public Accountability Collective (PFPAC) Weekly Digest (12 July - 18 July 2016)

Banking in Distress

PSBs, the darling of investors are surely in for a sigh of relief if a recapitalisation package of Rs. 15, 000 crore in the form of equity is through as expected. The love that had gone missing for a year is on the basis of aggressive stances taken by the government and the RBI. What about the deteriorating macro scenarios then? India Ratings has painted a bleak picture citing limited availability of growth capital pulling down growth trajectories for the Public Sector Banks. Whether, it is a model on outright purchase, called the Swiss approach, or a repurchase option, the German approach, Bad Banks are different from capitalising banks, as the approach involves purchasing the assets and then realising the best value. But, hope lingers on, or are these merely sandy architectures is for the reader to discern in this Arundhati Bhattacharya interview (h/t Vijayan). 


"The RBI recently released a new set of debt restructuring norms, that is, the Scheme for Sustainable Structuring of Stressed Assets (S4A). Do you think that will help in resolution?

Only a few companies will be eligible for S4A because, for example, the norm says you can only take the current cash flows. Current cash flows are happening in many of the units with very low capacity utilisation. 

So, if you take the current cash flows, it really does not work… rather you should take the cash flows where the capacity utilisation is at a higher level. It has to be a realistic assessment. 

Second, the norm says banks have to maintain the current rates of interest. The fact is borrowers are paying very high interest rates because the penal rates are in operation. If you continue with those level of interest rates, it does not look a workable situation. So, S4A is not meant for anybody and everybody. It has to be done selectively. We have given the feedback to the regulator."
+ The EX-es are reinstated, albeit in different capacities. Former CVC Pradeep Kumar, Head, and former SBI Chairperson Janki Ballabh, Member would be in a committee to work with banks to help the settle concerns of NPAs, and comfort them through an oversight mechanism. A cleaning up act would further capital infusion, won't it? 

+ While Rajan has often overtly called out to externalities as the chief reason for the rise in NPAs, and without doubt, his assessment holds true, the question that remains unanswered is: Why has there been such a sudden spurt in NPAs despite scrutiny of the loan book by internal auditors and external auditors on the panel of ICAI and Regulators under Sec 35 of RBI Act, from time to time? For Srinivas Dindi, VP, Syndications, SBI, US Operations, the answer to it lies in cha flows that were not adequately answered. For Dindi, there is a need to move away from ‘record of recovery’ to ‘adequacy of cash flows’ as the NPA norm and also look at adequacy of cash flows at the group level while assessing funding requirements of subsidiaries and/or associates.

+ Call it risk management in alignment with global practices, Sebi has observed that some banks who are also trading members or clearing members on the stock exchange/ clearing corporation have placed Fixed Deposit Receipts issued by themselves as collateral, with the clearing corporation, and has barred banks from using their own Fixed Deposit Receipts (FDRs) as collateral in their function as trading or clearing members of stock exchanges, directly or through associate entities. Global Collateral Management practices could be accessed here 

The All India Bank Employees Association (AIBEA) is all set to make public the names of 7,000 wilful defaulters, many of who are from Gujarat. The names are to be disclosed on the 19th of July. 

Multilateral Development Banks

Someone seems to have budged, and while it is nobody's guess who it could be, the appointment of two former senior officials from the US and Japan on to the international advisory panel of the AIIB could lend operational stability and transparency through a multilateral approach. Well, as with China, everything seems to be shrouded in anonymity for the time being. Appointment for some, Disappointment for one, as the fifth largest shareholder in AIIB, Korea could be losing national interest with no high-ranking official on Board the AIIB. 

+ BREXIT could lead to a BRIVOT to Asia. BREXIT would largely be vindicated, if through the AIIB and OBOR, Britain instrumentalists in forging vast productive linkages between East, South, Central Asia and Europe. 

+ Are we seeing the emergence of another Multilateral Financial Institution in the form of Islamic Finance Infrastructure Bank (IFIB)? Yes, as Saudi Arabia has joined Turkey, Indonesia and Jeddah-based Islamic Development Bank (IDB) as a prospective founder. What sets aside the nature of Islamic Finance, Islamic Banking in theory is asset-backing. 

+ Green Bonds are soon to become a reality, thanks to BRICS Bank. 3 Billion Yuan-denominated bonds are chiefly underwritten by Bank of China Ltd. with the proceeds to go financing green projects in BRICS countries. 

+ What's the world's top challenge? For IMF's Lagarde, it is a turning away from globalisation? The anti-globalization sentiment and the breakdown of global cooperation could reduce the opportunities for the low-income developing countries to improve their living conditions and contribute to the global economy, according to Christine Lagarde. So, what really faltered in Greece? A special case of rescue programme got stuck in a mesh of complex issues, which remained unspoken of. 

+ The transpiration happened last month with the World Bank approving a loan of $470 million for the North Eastern Region Power System Improvement Project. The Bank would provide close to 50% of the investment, while the rest is Centre's, rest assured, and one of the main agenda is also to unbundle investment climate in the 7 sister states. And there obviously is a $1 billion pledge to support solar plans in India. 

Policy and Macroeconomic Indicators

"Delays in key reforms like GST, non-resolution of tax disputes, banking issues due to NPAs and the need for significant recapitalisation of public sector banks are some of the biggest concerns of corporate India that have collectively impacted the business confidence affecting the overall business optimism in the country," according to the latest Grant Thornton International Business Report. Report can be accessed here.  

+ Jaitley reiterates Aadhar to ensure that direct benefit transfer (DBT) reaches the real beneficiaries. The Act is now operational with a legal framework. Interestingly, the framework is reached during the pendency of the petition filed by Jairam Ramesh challenging the decision to treat Aadhar as a money bill.  

+ In a first India-EU meet post-BREXIT, India wants the India-EU Bilateral Trade & Investment Agreement (BTIA) to go through, despite differences existing between the negotiating sides. Differences exist on broad contours of the proposed FTA, including the EU’s insistence on India to cut import duties on auto parts and wine and strengthen intellectual property rights regime, and Indian demand for more liberalisation in services and greater flexibility on data privacy.

+ In the backdrop of subdued commodities market, the government feels it’s better for PSUs to consider buyback of their shares rather than issue fresh shares at not-so-attractive prices. The Department of Investment and Public Assets Management (DIPAM), which was formerly the Department of Disinvestment, in May directed every PSU having net worth of at least Rs 2,000 crore and cash and bank balance of over Rs 1,000 crore to buy back their shares. This has been announced to better structure capital available with the PSUs. It is in this context that the government is in talks to buy back 25% of shares of Bharat electronics Limited (BEL) DIPAM is also planning to launch a new Exchange Traded Fund (ETF), which will comprise of stocks of listed CPSEs and central government’s stake in other corporate entities.

Amitabh Sinha: Two laws, PESA (Panchayats [Extension to Scheduled Areas] Act) and FRA (Forest Rights Act), which concern your ministry, have led to differences with other ministries. For instance, the Environment Ministry and Tribal Affairs Ministry have been at loggerheads over the FRA.

Jual Oram: Squabbles between ministries happened in the previous government, they don’t happen in our government. Both the ministries (Environment and Tribal Affairs) sat down and decided that the FRA would fall within the ambit of my ministry and forest rights would fall within the ambit of the Environment Ministry. Aside from the episode in Maharashtra (where the state government had attempted to frame rules that could have potentially led to dilution of the FRA) there has been no difference. This (the impression of differences) is something that people are trying to create. Currently, the Forest Rights Act is being implemented as it is. This interview is really important. Read More

+ Masala bonds raise by HDFC are a first of its kind in India. Masala bonds allow an issuer to raise funds in the overseas market without taking on the currency risk typically associated with foreign currency-denominated bonds or loans. The risk lies with the investor and the Indian company can access a wider set of investor base. The concept of masala bonds was first spelt out by RBI in April 2015, following which the central bank issued guidelines for the securities in September. The idea was to allow Indian companies to raise money through an overseas debt instrument where the currency risk lies with the investor rather than the issuer. A number of countries do this. China, for instance, issues local-currency offshore bonds known as “dim sum” bonds. Here is an adumbration of what exactly are these bonds and how would they help Indian companies?

+ Dividend distribution policy a must for top 500 listed firms: Sebi. These new norms will not force companies to pay dividend, but will help investors get a clearer picture on returns from their investments in such listed firms and also identify stocks matching their investment objectives.

+ Rajan has been absolutely inimitable in his rational criticisms of the Government. When asked about India’s ability to achieve 8 per cent growth, Rajan said being “overly fixated” on a certain growth number should not be the priority, rather the focus should be on carrying out structural reforms that will enhance the pace of growth and ensure macro stability. When will the dogs stop chasing their own tails?

Currency

Be less interventionist, define excess volatility and building up reserves is what former Governor of the RBI, D. Subbarao thinks would help in making forex policy transparent. Policy, he felt, should be less interventionist than it has traditionally tended to be. RBI should shift more of the adjustment burden on exchange rate movement to market participants. In this context, it should indicate more clearly what would be considered ‘excess volatility’ that would trigger intervention.

Taxation

Government extends payment date to September 2017 in regards black money compliance scheme by allowing payment of tax and penalty in instalments over an extended period for the black money disclosed under the one-time compliance scheme, debunking certain assumptions that the effective tax rate could work out to be 31 per cent, much lower than mooted. 

+ This time, GST looks a possibility, as there is thaw in the opposition. Once approved by parliament, the amendment must be ratified by the legislatures of half of India’s 29 states, though that process is expected to go smoothly given the general consensus on the issue. Yet India’s parliament will then have to pass two new pieces of legislation to detail the new tax code - including the proposed tax rates. Similar tax laws will also have to be passed by at least 22 states. The government will also need a new IT system, on which work has already begun, as will companies. If the GST gets passed, it is all hunky dory for the Indian media and entertainment industry, as the concerns of cascading and dual-taxation impact in the sector would be addressed. Meanwhile, the North East should have a separate taxation regime that would halt diversion of trade between states, according to the Finance Minister of Assam. 

+ Cairn Energy tax conundrumCairn Plc has claimed compensation of $5.6 billion from India in legal proceedings against the retrospective tax demand and said it would never have chosen London for its IPO if it had an inkling India may change rules to levy capital gains tax on "routine transfer" of shares.  

+ Not really sure how much of this is actually within the purview of the digest, but it nevertheless finds a mention here for a huge relief to taxpayers in terms of providing for procedural mechanisms to effectuate foreign tax credit as envisaged under the Income Tax Act and Double Taxation Avoidance Agreements. The so-called Rules that amend to provide a separate segment on foreign tax credit remove anomalies that existed in the draft form especially in terms of clarity of timing mismatches across jurisdictions, foreign exchange fluctuation, disputed foreign income and ease in documentation requirements.

Corporate Scan

Energy giant RIL Q1 profits beats expectations and rises 18% on a stronger-than-expected gross refining margin, or GRM, the difference between the per barrel price of crude oil and the value of petroleum products distilled from it. The company’s GRM strengthened to $11.5 from $10.4 a year ago. Analysts had expected a GRM of $9.5-10 per barrel. Here is a video of major takeaways. 

+ On the IT side, Infosys disappointed with revenue performance in Q1 forcing it to slash outlook, while Tata Consultancy Services (TCS) saw a 3% rise in revenue, but in accordance with International Financial Reporting Standards (IFRS) saw its net profit dip by 0.4%. Strong execution and accelerating customer adoption of cloud, big data & analytics has driven broad-based growth across key markets and industries, and has stood in good stead for TCS. For Infosys, unanticipated headwinds in discretionary spending in consulting services and package implementations as well as slower project ramp-ups in large deals that the company had won in earlier quarters, resulted in a lower than expected growth in Q1. ET dissects Infosys versus TCS stocks in a race after Q1 results. 

Infrastructure

Public Accounts Committee of Parliament has slammed Secretaries of Government of India for inordinate delay in deciding the issue of exploration of Ratna and R series hydro carbon fields by private sector and demanded to see the annual confidential reports and annual performance reports of of all officers in the Negotiating Team of secretaries and those assisting it. 

+ India is scouting for U.S. investment and technology for its infrastructure development program, which has gained considerable momentum in the past year after the reformist Narendra Modi launched the Sagar Mala project. And, Gadkari in a typically copy paste with his senior boss and Dear Leader (Pun always intended!) has invited the iconic Tesla to make an India entry. 

+ Finally something on National Investment and Infrastructure Fund (NIIF) that appears to move, even if it is in the realm of identification of projects, 8 in number to begin with for investment. This is a momentum, as a majority of news hitherto only talked of setting up of NIIF!!!! The government in December created the Rs.40,000 crore NIIF as an investment vehicle for funding commercially viable greenfield, brownfield and stalled projects. Currently, it is focusing on investing for stable operational and greenfield projects to lower the risks from stalled assets to investors. The Centre plans to invest an initial corpus of Rs.20,000 crore in NIIF and ultimately expects the corpus size to increase to Rs.40,000 crore, half of which will come from new investors, who will hold about 50% in NIIF. Fresh from raising $14 billion to invest in infrastructure, believed to be the largest single commitment to the sector of its kind, the Toronto-based Brookfield group is believed to have been approached to partner the government's National Investment and Infrastructure Fund (NIIF), coming on board as one of the key sponsors to the Rs 40,000-crore corpus. The Canadian asset manager could invest over $2 billion in India over the next 2-3 years to buyout upscale offices and commercial towers, stranded roads, power and utilities infrastructure as it aims to double its existing asset base in the country.  


+ A trivia that could come up later exposing its full value...Gujarat has infra projects with maximum value in PPP mode across the country. 




+ Finally, something to cheer about on the exports front, but deconstruction required, for the Government's reliance on data often is flirtatious with imprudence. 

Activism

Not strictly activism in the traditional sense of the term, but this idea could be germane in times to come. Also, not in the Indian context as of now, the world Bank, if it continues to violate its safeguards could pose a blanket challenge the world over to indigenous populations. Calvert Social Investment Fund are considering a ban on purchasing World Bank loans in response to proposed changes in the Bank's Environmental and social Safeguards Framework weakening protections for indigenous peoples. 

+ Again, not strictly in the activism arena. it is being placed here for topicality. Non-Bt desi cotton makes comeback in North-West India. 

Audit

....the overall estimation of the CAG is about the way the State departments are responding to various lacunae or irregularities discovered by the audit teams, it appears that either the departmental functionaries are not conversant with the established process of handling or responding to the observations of the CAG or there is deliberate attempt to undermine the authority and status of the CAG. Here is a further reflection. Ten CAG Reports are to be tabled in the Parliament during the monsoon session beginning Monday. 

Representatives of private telecom operators, which appeared before a Parliamentary panel this week, expressed willingness for out of court settlement of the cases of under-reporting of revenues, a suggestion which was rejected by the Telecom department. Telcos also expressed disagreement with some figures and definition of revenue under-reporting pointed out by the department. The CAG’s audit covers a period of only four years from 2006 to 2010 and not the entire period of over 16 years since 1999. It is believed if the loss to the exchequer from underreporting of revenues by telcos for their entire period is calculated it could go up manifolds.

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